03/02/2015

The Fifth Circuit Court of Appeals has determined that houses built based on infringing designs constitute an “advertisement” as that term was defined under Commercial General Liability (“CGL”) policies issued by Mid-Continent Casualty Company and the policies therefore provide coverage for the copyright infringement. See Mid-Continent Cas. Co. v. Kipp Flores Architects, L.L.C., No. 14-50649 (5th Cir. filed Feb. 26, 2015).

This insurance dispute under a CGL policy’s advertising liability coverage section arises out of Kipp Flores Architects, LLC’s (“KFA”) agreement to supply Hallmark Design Homes, L.P. (“Hallmark”) with 11 different house designs, each of which Hallmark was authorized to build once. If Hallmark wanted to build any additional houses, the contract required Hallmark to pay a license fee. Hallmark, however, built several hundred homes based on the designs without paying KFA the license fee. When KFA discovered Hallmark’s actions, it sued Hallmark for copyright infringement. KFA secured a jury verdict finding that Hallmark infringed on all of KFA’s house designs and awarding KFA damages.

Once it secured the judgment, KFA sought coverage under the advertising liability section of several CGL insurance policies issued to Hallmark by Mid-Continent Casualty Company (“Mid-Continent”). The policies provided that the holder of a judgment against Hallmark may recover under the policies. The policies generally excluded coverage for copyright infringement, but provided a limited exception for “advertising injury” arising out of copyright infringement in Hallmark’s “advertisement.” The policies defined “advertisement” as “a notice that is broadcast or published to the general public or specific market segments about [Hallmark’s] goods, products or services for the purpose of attracting customers or supporters.”

Mid-Continent filed a declaratory judgment action in the United States District Court for the Western District of Texas, asking the court to find that it had no duty to indemnify KFA under the policies. After both parties filed motions for summary judgment, the district court granted KFA’s motion—finding that the judgment was for a covered advertising injury and that Mid-Continent was therefore required to provide coverage.

Mid-Continent appealed to the Fifth Circuit. A key issue before the court was whether the infringing houses built by Hallmark were “advertisements” as that term was defined under the policies.

In the February 26, 2015 opinion issued by the Fifth Circuit, the court found that the infringing houses amounted to “advertisements.” The undisputed evidence before the court was that Hallmark used the infringing houses themselves to market to customers. Mid-Continent, however, argued that the infringing houses could never be an “advertisement” under the policies because a house cannot be a “notice,” and it cannot be “broadcast or published.”

In rejecting Mid-Continent’s argument, the court pointed out that Mid-Continent’s policies did not specify that a “notice” had to take a particular form—such as a writing or a website—and never excluded a physical object from the definition. Likewise, the policies did not define the terms “broadcast” or “published.” The court held that while the term “broadcast” generally implies radio or television advertisement, the term “publish” normally means “to make public or generally known” or “to make generally accessible or available for acceptance or use (a work of art, information, etc.); to present to or before the public.”

The court therefore found that the houses fell within the policies’ definition of “advertisement.” Specifically, the court held that because it was undisputed that Hallmark’s primary means of marketing its construction business was through the use of the houses themselves, “Hallmark’s use of the infringing houses satisfies not only the policies’ expansive definition of advertisement and Texas law’s similarly broad construction of the term, but also common sense.”

This opinion provides support for the position, that under certain circumstances, a product itself can constitute an “advertisement” under a CGL policy—depending on the specific facts and policy language.

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